Post on 10-Jan-2022
The Gas Industry in Japan
Hideo Taki
Working Paper No. 117
A version of this paper was presented at the conference Micro-economic Reform and Deregulation in Japan held at Columbia University on March 22-23, 1996.
Working Paper Series Center on Japanese Economy and Business
Columbia Business School June 1996
The Gas Industry in Japan
Hideo Taki
Manager, Corporate Planning Department Osaka Gas Co., Ltd.
The structure of the Japanese gas industry is characterized by the large number of distribution companies involved. As a result of limited reserves and geographical constraints, the gas production and transmission sectors have not been significantly developed.
Following deregulation in the US and UK, the process of liberalization began in the Japanese gas market in March 1995. As a result the gas supply market to large-volume users --those with minimum annual consumption of 2 million cubic meters— was liberalized. To promote management efficiency, a new gas rate system based on existing total-cost analysis was introduced and guidelines for pipeline access were also published. Amendments to the Electricity Industry Law have resulted in partial liberalization of the wholesale electricity market, creating new opportunities for gas companies.
These and other regulatory changes will require some reorganization of Japanese gas industry structure and gas company management styles.
THE GAS INDUSTRY IN JAPAN
Hideo Taki
Osaka Gas Co., Ltd.
Chapter 1: Energy demand and supply
Demand
First, I would like to review recent trends in Japan's energy supply and demand. The
Japanese economy has made a moderate recovery since it bottom in October 1993. Under
these improved conditions, the energy demand for 1994 showed a high growth reflecting
high-level productive activities and the record-breaking hot summer even though GDP still
remained at low levels.
The total primary energy supply in 1994 recorded a high growth rate of 4.9%, especially
true for nuclear power (+8.0%) and oil (+6.3%). This is the second highest growth rate
after that of 1988 which was recorded at 5.5%. In fact since 1988 there has been a
gradual decline in annual growth rate. Natural gas consumption increased by about 6.1 %.
(Refer to Table 1) As a result, the share of oil is still 56% of the total.
Table 1 : Total Primary Energy Supply (annual growth)
The final energy consumption also showed a 3.7% growth compared with that of the
previous year. About 50% of this growth was affected by the increased energy use in the
industrial sector. The transportation sector and residential/commercial sectors
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contributed 30% and 20%, respectively. Although both electricity (+6.7%) and
oil (+3.7%) consumption increased, city gas remained at a very low-level of growth
(+1.6%). This is partly because of the record-breaking hot summer and drought, the
influence of the Hanshin-Awaji earthquake of January 1995 and very high growth
(+8.0%) in 1993. (Refer to Table 2)
Table 2 • Final Energy Consumption
(annual growth)
The share of city gas in the final energy consumption figures accounts for only 5.5% in
1994 while oil and electricity accounts for 61% and 21%, respectively. Because of this
small share and poor development of gas pipeline networks, the Japanese gas industry is
still in a pre-matured stage.
City gas demand
The volume of gas sales is steadily increasing and recorded 19 bcm in 1993 which
is 8.0% increase compared with that of in 1992. This is strongly supported by continuous
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growth in the industrial sector which has an annual increase in the volume of sales which
usually exceeds 10%. Although the growth rate has became less rapid, it still maintained a
high 8.4% rate growth thanks to new demand represented by the introduction of
cogeneration systems. City gas use in the residential sector, on the other hand, decreased
by 6.6%. Osaka Gas experienced a 5 to 10% reduction in gas sales due to the effects of the
Hanshin-Awaji earthquake.
However, partly due to the Hanshin-Awaji earthquake which hit the Kansai area in January
1995 and partly due to extremely hot weather in the summer of 1994, gas sales increased
by only 1.6% in the fiscal year of 1994.
For reasons of energy-efficiency, and because of the restrictions on the electricity supply
and difficulty of building large new power plant near centers of demand, the construction
of small power generation plants with gas-fired cogeneration is expected. Gas utilities
will pay more attention to the development of cogeneration systems, especially for
commercial customers.
Gas air-conditioning systems contribute to the efficient operation of gas supply facilities by
creating new off-peak demand and, as a result, leveling of annual and daily load curves.
They also help to level out electricity demand peaks.
In the residential market, where gas has had an excellent reputation as an economical and
convenient fuel for household facilities, especially for cooking, it has started to compete
seriously with electricity. The share of gas use in the market which has been decreasing
year by year, accounting for less than 50% of the total since in 1990. On the other hand,
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the percentage of gas use in the industrial sector exceeds 30% from a base of only 5.8% in
1970. (Refer to Figure 1 )
The development of vehicles running on natural gas is still at a preliminary stage, with only
about 250 vehicles and 6 filling stations throughout Japan as of January 1994. However,
with the increasing concern for environmental protection, and keen support from both
government and the gas industry, 200,000 natural gas vehicles are expected to be in use by
2000.
Figure 1 : Gas Sales by Markets
According to the Long-term Energy Supply/Demand Outlook (LTESDO) of June 1994, gas
consumption is expected to rise by an annual average of 4.3% to the year 2000, and from
then until 2010 by 3.6% per year.
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Natural gas demand
Approximately 55-56 bcm of natural gas was consumed in 1993: about 75% of this was
burned for power generation companies and the remaining 25% was used as a feedstock
for city gas. Natural gas accounted for only 11 % of primary energy consumption in 1994.
This natural gas is currently only available in and around major cities like Tokyo, Osaka,
and Nagoya, where LNG is unloaded. Its share has increased steadily from only 1.5% in
1973, and natural gas is widely recognized as one of the principal alternative fuels to oil,
especially after the Gulf crisis of 1990. In May 1992 the Advisory Committee for Energy
to MITI (the Ministry of International Trade and Industry) produced an interim report.
This report commented on the extensive use of natural gas as a principal energy source.
According to the LTESDO of June 1990, natural gas demand was forecast to increase from
46 bcm in 1988 to 63 bcm in 2000 and 79 bcm in 2010. This LTESDO was revised in
1994 and forecasts for the years 2000 and 2010 have been increased. Predictions are
now for approximately 73 bcm in 2000 and 80-83 bcm in 2010.
One thing to note here is that the demand for natural gas for power generation is forecast
to level off between the years 2000 and 2010. This is because of the unfavorable
environment which is expected for developing new LNG sources, the shifting back to other
fuels due to the higher prices of natural gas, and the higher efficiency of gas-fired
combined cycle power plants with lower gas consumption. On the other hand, the
demand for natural gas for city gas distribution is forecast to grow steadily. The outlook
indicates a 3.7% annual growth through the year 2000, and a 3% growth between 2000
and 2010.
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According to the outlook, the total primary energy supply is expected to grow at about 1%
annually through the year 2010. Figure 2 shows an expected balance of primary energy
in the outlook. A major increase in nuclear power generation is expected after 2000. It
is based on the assumption that difficulties faced in construction of nuclear power plants
will ease after 2000 and that the availability factor will be increased by shorter
maintenance time.
Figure 2 : Balance of Primary Energy
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Chapter 2: The history and structure of the gas industry
The history of the development of gas utilities
Natural gas was discovered in Japan before 1645 and used locally for residential purposes
only. The manufacture of gas for lighting began in 1872. However, because of limited
reserves and geographical constraints (Japan being a group of largely mountainous
islands), the gas production and transmission sectors were not significantly developed.
Instead, gas was both manufactured and sold locally to densely populated areas in the
center of towns. In other words, it was a business concerned with carrying feedstock to
the area of consumption, manufacturing gas and distributing it to the local consumers.
There is a sharp contrast between the histories of the gas and electricity businesses. The
state-owned Nihon Hatsu-soden company, which dealt with electrical power generation
and transmission, was established during the Second World War, and was divided into
nine power generation companies after the war. The period of state ownership saw the
establishment of electricity transmission grids extending from the north to south of the
country.
The structure of the gas industry
Under the Gas Utility Industry Law, there are two gas businesses; the general gas business
(the city gas business) and the simplified gas business (the gas business for small residential
areas using simple gas production facilities). There are also liquefied petroleum gas
suppliers whose customers consist principally of domestic users and some small businesses.
The structure of Japanese gas industry is characterized by the large number of distribution
companies As of March 1995 there were 243 gas utility companies in Japan, of which
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172 were private companies and the remainder were operated by municipalities. Each
company has its own monopoly supply area, but there are very few interconnecting
pipelines in between. More than 23 million customers use gas supplied by all the gas
supply companies together. The major gas utilities, Tokyo Gas, Osaka Gas, and Toho Gas
accounted for more than 75% of the total gas sales and supply about 65% of customers.
The calorific value and the specific gravity of gas supplies vary from region to region and
as a result there are 13 different kinds of gas in Japan. This is not only inconvenient for
consumers, who need to adapt their gas appliances when they move between areas; it also
means that the gas industry cannot benefit from economies of scale in respect to imported
gas. The integration of gas types is therefore a high priority task for the Japanese gas
utilities.
Feedstocks
Until the mid-1950s coal had been the main feedstock for gas manufacturing; it was
replaced by oil and then by natural gas. About 95% of natural gas is imported in the form
of Liquefied Natural Gas (LNG) and only 5% is domestically produced. As of 1992 a total
of 110 city gas utilities were using natural gas (including both LNG and indigenous natural
gas). Forty-five companies use LNG and 80 companies (including 15 companies who use
LNG as well) use indigenous natural gas. Natural gas accounts for 78% of gas feedstocks.
The three major gas utilities have already finished conversion to natural gas within their
service area. (Refer to Figure 3)
Indigenous natural gas is produced in the northern parts of Japan's main island Honshu,
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Figure 3 : Gas Supply by Gas Utility Companies in Japan
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for instance in the Niigata and Akita prefectures, but owing to poor geology the recoverable
reserves are not significant. In 1992, Japan imported about 96% of its total natural gas
consumption.
Sources
Natural gas is imported in the form of LNG by a consortium of electricity and city gas
Utilities. Japan is the largest LNG importer in the world and has long experience of the
business. LNG was first imported from Alaska in 1969 by the Tokyo Electric Power
Company and Tokyo Gas Company.
Sources of LNG are now diversified between mainly Pacific basin countries such as Alaska,
Australia, Brunei, Indonesia and Malaysia. Indonesia is the largest supplier to Japan,
accounting for 47% of imports in 1992. The Asia-Pacific region is rich in natural gas
reserves and there have not been any significant political trade disputes so far. As a result,
there have been no supply problems with LNG deliveries to Japan.
According to the recent demand and supply forecasts, existing contracts will be able to
meet increasing demand in the Asia-Pacific region until 2000. However, after 2010,
many existing commercially attractive natural gas fields are likely to be depleted and
importers will be forced to gain access to more remote and expensive gas fields, in regions
that are potentially politically unstable. In such a situation, importers wishing to acquire
favorable trading partners may need to take the initiative in locating future sources of
supply.
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Security of gas supply
Natural gas trade by pipeline and LNG have different advantages and disadvantages, and a
comparison in terms of security of supply is not a simple matter. Japan has paid a great
deal of attention to various aspect of LNG security: technical (safety design of LNG receiving
terminals, etc.), political (contracts with politically stable countries) and commercial
(long-term contracts).
Importing natural gas as LNG itself assures security of supply because of the nature of LNG
contracts, whereby, for instance, specific sellers and buyers are directly linked and a huge
investment is needed.
In addition to the diversification of import sources and contracts, Japanese companies
consider that the following options would improve security of supply:
-Technical and financial cooperation between sellers and buyers;
-Development of gas storage;
-Arrangement of gas interchange between domestic utilities;
-Development of a national transmission pipeline;
-Participation in upstream businesses.
Studies have been carried out on measures to counter both short-term and long-term
interruption of supply and on the interchange of gas between domestic utilities. Gas
utilities are engaged in the development and manufacture of Substitute Natural Gas (SNG)
in order to diversify gas feedstocks and to cope with unusual demand fluctuations.
Recently, Osaka Gas Company, one of the major city gas utilities, has participated in
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upstream investment. For example, it has obtained concession rights for natural gas
exploration and production in Indonesia, and established a company building and
operating LNG tankers for its own use.
Transmission pipelines
Natural gas use in Japan started as a fuel for power generation and a gas-making feedstock.
In addition to the geographical constraints, there was no need for large-scale gas
transmission pipelines to connect gas distribution companies because of the differences in
gas types that they manufacture.
Although natural gas pipelines do exist, they do not extend very far. The exception is the
Tokyo ('Teiseki') pipeline, which was completed in 1962, and is about 300 km in length.
(Refer to Figure 2) It carries indigenous natural gas produced in Niigata prefecture to 32
gas utilities, and is owned by the Teikoku Oil Company, one of the major indigenous
natural gas and oil producers and a gas wholesale company.
The Advisory Committee for Energy pointed out the need to improve the gas supply
infrastructure in May 1992. The Committee recommended the construction of national
gas transmission pipelines, emphasizing, as a first stage, the need for a transmission
pipeline connecting three major cities (Tokyo, Nagoya and Osaka), the territories of the
three major gas utility companies, and the LNG terminals which they operate.
The development of such a gas transmission pipeline would enable delivery of natural gas
to the local consumers who were previously unable to use gas owing to the lack of
infrastructure. It will also help to alleviate problems of electricity supply by supplying
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fuel gas for on-site power generation plants. As a result it will provide extensive
opportunities for increased natural gas use.
The Japan Gas Association (JGA) announced its plan on national pipelines in March 1993.
It entailed the construction of a 1,200 km pipeline from Tokyo to Osaka through Nagoya,
starting in 2000 and to be completed by 2010, requiring an investment of about US$9
billion. According to the report by JGA, therefore, extending the use of natural gas will go
a long way towards achieving the country's energy policy goals in the context of
environmental protection and efficient use of energy. JGA implied that other utilities and
public organizations also needed to participate in the construction of this infrastructure,
under the initiative of gas utilities.
Participation in upstream businesses
In Japan participation by distribution companies in the gas production business was not
common. Transmission did not exist as a separate business. There has as yet been no
participation by gas distribution companies in upstream business. As well as weighing up
the possible risks and returns, Japanese gas distribution companies always worry about
whether participation in the upstream business is acceptable, given that they are public
utilities. However, involvement in the upstream and transportation businesses will
provide these companies with useful information to ensure security of supply of gas
feedstock and also to develop management skills with the aid of experienced partners.
Safety concerns
Japanese gas utilities have worked hard to prevent disruption of gas supply by earthquakes
through the development of sophisticated engineering and information technologies in the
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distribution system. In order to reassure the public about the safety of gas, several systems
and appliances have been developed that will absorb shocks and movements caused by
earthquakes and prevent accidents even when consumers are at fault.
Activities of gas utilities
The activities of the gas utility company extend from the import and regasification of LNG,
manufacture and distribution of gas and the maintenance of gas distribution facilities and
appliances, to various services associated with gas use. Their efforts contribute to the
creation of more comfortable communities and private life, and in the case of some major
companies range from recommendations for energy efficiency in urban developments, to
advising potential consumers on home improvement schemes designed to achieve a better
quality of life.
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Chapter 3: Gas industry regulation
General
The regulation to the gas industry dates back from the original Gas Utility Industry Law in
1923. The Japanese gas industry is regulated by the Gas Utility Industry Law. This law
gives MITI a broad authority to supervise and regulate the commencement of a gas utility
business, the suspension and closure of its operations, the fixing of gas tariffs, the terms
and conditions of gas supply, and so on. Under this law, gas utility companies have been
granted a monopoly position in their specified service area. In order to avoid the
undesirable conditions of a monopoly and to ensure the continuous stability of businesses,
the law regulates the structure of the industry by entry regulation and the prices. Its basic
framework is in common with that of in the industries which are assured a local monopoly.
In spite of the major differences between gas utilities in the scale of business, demand,
supply and management structure, the regulation is implemented uniform basis.
Government has made it clear that the Gas Utility Industry Law is aimed at minimum level
regulation and that the law should be implemented for medium and small companies in a
simplified manner.
City gas business is locally oriented and supplies indispensable energy for people's daily
lives. Its scale of business is determined by the level of development of the area and its
geographical extension. Whatever the size of its business, it is essential to the people of
the area. The current structure of the industry and the number of companies are
spontaneous results of operating gas businesses in ways that are an efficient fit for market
conditions at each area level. Gas businesses are established according to the
characteristics of demand. As urbanized areas of cities are not connected each other in
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Japan, it is natural that the number of gas utility companies increases accordingly.
Compared with the electricity industry, the gas industry is smaller in the scale but greater
number.
Pricing
Prices charged by Japanese gas companies to their customers have so far been worked out
and approved by MITI on the basis of adding a rate of return over total operating costs
which include feedstock, labor, operation and maintenance. This system of a full analysis
of costs and expenses was used until the end of December 1995.
Compared with other developed countries, gas prices in Japan are seen by many to be high.
Table 3. shows gas prices for residential consumers in major countries. Figures are
converted relative to exchange rates and purchasing power. The monthly bill of a
Japanese household consuming 50 m3 ( 550 Meal ) per month is approximately double
that of an equivalent household in the US. This is because Japan's gas industry is
overwhelmingly dependent upon imports, the manufacturing process is quite expensive,
and storage costs are high. Therefore, to make comparisons with gas prices in other
developed countries is misleading. So, instead of using international yard sticks, MITI has
decided to concentrate on creating Japanese comparisons.
Japanese gas tariffs use two systems; one is a general tariff and the other is a load-
managing contract tariff. The general tariff is charged to general customers when gas
companies supply gas to groups of customers with different loads and it is clear that the
total load balance is improved by increasing the percentage of better demand. The load-
managing contract tariff system is operated in order to reduce gas costs by developing a
large demand with further better load, flattening the potential load fluctuation as much as
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possible, and promoting the efficient use of the facilities.
Table 3: Comparison of gas prices (residential use) (Yen/m3)
There is a significant difference in the level of costs and prices between gas utilities in Japan.
They are due to the difference of supply structure such as the demand structure, source
materials for gas feedstock and weak pressure to further competition. This is because the
degree of competition in the residential market which medium or small gas companies rely
on more is not as severe as those in the industrial and commercial market. It is necessary
that regulation systems be established which will encourage further competition on
medium and small gas companies.
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The Regulation of associated businesses (Associated business : business other than gas
business run by gas utilities)
So far, the Japanese gas industry has, in the main, focused on a single business sphere - gas
distribution. This is because gas utilities have been regulated and limited to business in
this sector alone. Under the Gas Utility Industry Law, utilities have to receive authorization
from MITI when they want to run businesses other than gas businesses.
However, there are a few exceptions to this rule. These exceptions allow gas utilities to
operate businesses such as those which sell the by-products of gas manufacturing, gas
meter repair and maintenance, and the selling gas of appliances, all without the need for
MITI authorization. This is because these businesses are seen as having a close relationship
with the gas business and therefore allowing gas utilities to operate in these areas
contributes to sound management. As gas utilities are not regulated in their investment in
subsidiary companies, they run several associated businesses other than gas business
outside of the Gas Utility Industry Law. These businesses include selling of gas appliances,
related gas piping work, building management, the operation of restaurants, development
of computer software, and real estate businesses.
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Chapter 4: Deregulation in the gas and the electricity industries
Deregulation in the gas supply to large-volume users
The central issue in the course of the revision of the law was the deregulation in the gas
supply to large-volume users. Recent environmental restrictions and technological
innovations have fueled demand for city gas by large-volume users in the industrial and
commercial sectors ( This share of the total gas sales rose from 34% in 1972 to 52% in
1992. ) Large-volume users are generally in a position to easily switch to other fuels
such as heavy oil and LPG ( Liquefied Petroleum Gas ) and have the power to negotiate
price with gas suppliers. As such, they seek supply and rate setting conditions that are in
line with other fuel suppliers. Specifically, they demand the right to negotiate rates and
receive supplies outside the service area.
Taking into account such developments, the Urban Heat and Energy Subcommittee of the
Advisory Committee for Energy to MITI compiled a report including a proposal for
deregulation of gas supply for industrial customers. MITI prepared a draft amendment of
the Gas Utility Industry Law for the ordinary session of the Diet in Spring 1994. An
amendment to the Gas Utility Industry Law was passed, and came into effect in March
1995.
Generally speaking, under the previous law, gas companies were only allowed to supply
gas to consumers, large scale or not, within their service area and at tariff levels authorized
by MITI. Potential users outside these service area were not able to use gas. Further
restrictions meant that these large users were not generally allowed to buy gas from any
company other than the authorized gas company.
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Major changes have taken place which mean that the gas company is able to offer its own
tariff levels for supplying large users within its service area. This company is also able to
supply large (industrial) users outside its service area and again can propose its own prices.
Another major change is that, for the first time, a non-gas company is able to supply gas to
large users in any area and on a non-regulated price basis. This means that a franchise of
utility monopoly may disappear. In other words, gas utility companies are free to sell to
any consumer and in turn they are at risk of losing their own consumers to competitors,
since consumers are free to select their suppliers as they wish.
While reviewing the regulation on gas supply to large users, various challenges emerged
which prevented the gas industry from drafting unified proposals. For example, what
should the threshold be for large users? As there are 243 gas utilities in Japan, it was not
easy to reach an agreement with all the conflicting interests between large and medium to
small gas utilities.
Eventually, it was defined as those using more than 2 million cubic meters annually .
About 430 consumers meet this threshold at present, comprising about 21% of the total gas
consumption in Japan. This threshold was originally proposed at one million cubic
meters but there was a strong opposition from competing fuel industries, especially LPG
dealers, who were afraid of losing their market share.
By establishing flexible tariff setting taking account of conditions of gas use, it is generally
thought that both large-users and small users will benefit. According to the Urban Heat
and Energy Subcommittee of the Advisory Committee for Energy, large industrial users
were thought to have more energy options. Small users were thought to benefit indirectly
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through lower unit costs per demand through the economy of scale resulting from
expanded demand from industrial users. Competition with other fuels by deregulation in
large-users market was expected to encourage gas companies to make efforts for more
efficient management and as a result bring total unit cost reduction.
On the other hand, there was a fear that the tariffs of large users might be set at the risk of a
negative effect on small users. In order to ensure that there is no adverse impact on the
small volume users, in this respect, the revised Gas Utility Industry Law required the
following procedures:
a: Large- and small-volume users must be clearly demarcated and managed
accordingly in the accounting process.
b: Rate revisions on the small -volume users are not accepted to compensate for
deterioration in the large-volume user's sector.
c: Each fiscal year, MITI assess the accounts of large-volume
demand, and examine the results to see whether the gap between projected and
actual demand is not too large.
d: Supplies to large-volume users outside the service area needs to be authorized by
MITI.
The Urban Heat and Energy Subcommittee of the Advisory Committee for Energy to
MITI also pointed out that small users would not be in a position that they can easily
change fuels and that they do not have the power to negotiate with gas utility
companies. The Subcommittee, therefore, thought that it was necessary to protect
small users by defining gas utilities' service areas with supply obligation and tariff
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regulation. As a result, government approval is still necessary for any gas supply to
medium and small users across the border of a gas company's existing service area.
This is because the government has to ensure that local gas companies maintain their
social obligations and that the interest of medium and small users within the service
area should not be harmed by the deregulation in the large user supply area.
This deregulation will make natural gas available to more users, in line with national
energy policy of Japan.
New gas rate system
In launching the reform review process in 1994, the Economic Planning Agency pointed
out that Japanese utility companies charge prices which are seen by many as too high, at
least when compared to prices elsewhere in the world. With the progressive appreciation
of the Yen, public interests in ways of tariff setting for public services and lower gas prices
increased. Under these circumstances, the Urban Heat and Energy Subcommittee of the
Advisory Committee for Energy to MITI have discussed several issues on gas related to
utility tariffs since October 1994. Several possibilities for changing the system for price
setting have been examined. Three possible candidates were considered: the 'price cap', the
'yardstick', and performance-based regulation (PBR). The interim report of the
Subcommittee recommending the introduction of a new gas rate system which sets a target
for efficient management and a so-called Yardstick-type assessment. This was published
in July 1995.
Following a framework of a new rate system, comprehensive discussions have been taken
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place. The new gas rate system was introduced as of January 1996, which was intended
to further promote increased management efficiency. Management efficiency is
voluntarily initiated and pursued by individual gas utilities. Based on the existing total-
cost analysis , the new system incorporates the following factors:
a: Gas companies declare their own targets for making their operations more
efficient and institute a process for clarifying these targets to customers.
b: MITI conducts reasonable evaluations to ensure that these targets lead to
appropriate tariff levels, and then these targets will be reflected in the tariff
setting process. The evaluations are based on a yardstick approach and consists
of the following two steps.
1st step: individual review -on management plans and performance
2nd step: comparative review -by grouping similar companies
c: Introduction of the purchased gas cost adjustment clause.
That is, gas rates to be applied under the new system will be reviewed not only by a
conventional individual evaluation but also by a 'Yardstick' approach in which a
comparative review is conducted among companies with similar characteristics. Prior to
the comparison, 243 gas utilities are categorized into several groups according to their
similarity for evaluation purposes and the different target ranges which are to be
established. The similarities are judged by such factors as company size, form of
management (private or public company), and raw material sources (LNG or
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manufactured gas) were taken into consideration.
Through comparative review among the companies in the same group, efficiency
improvement efforts are evaluated, and according to the results, deferent degrees of rate
modification are granted to individual companies. This is expected to promote indirect
competition among companies.
After a great deal of discussion, 243 gas companies were divided into 16 groups. Groups
can be regrouped if necessary.
Annual evaluation
In order to verify the efforts at efficiency improvement, companies are required to make an
annual evaluation on the financial status and degree of efficiency improvement, and the
results will be published.
Purchased gas cost adjustment clause
A purchased gas cost adjustment clause has been introduced to all the rate classes
including the residential rate in order to directly reflect to the rates in the fluctuations of
gas costs caused by the changes in exchange rate and crude oil prices.
New gas tariffs were proposed by 8 gas companies and evaluated by MITI based on the new
system. MITI required a 2.02% cut in the average from the previous tariff levels while the
proposed one from gas companies was a 1.2 5% cut in the average from the previous one.
Some companies requested a price rise, but only one company received a price increase
approval as a result of the evaluation. The new rate of return was modified to 5.34% from
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the existing 7.2%.
Pipeline access
A guideline for pipeline access was published in July 1995. Following the report of the
Urban and Heat Energy Committee of the Advisory Committee for Energy to MITI
recommending a deregulation of entry into the large industrial users market in January
1994. The guideline was published to promote pipeline access so long as it does not prevent
the fulfillment of supply obligation of gas utilities. This transportation service is to
encourage the participation of new entrants in the large user market. Unlike in the US
and UK, pipeline network development in Japan has been very limited and most of the
pipelines are for distribution purposes. Therefore, the guideline only stipulates some basic
principles that are considered to be necessary to ensure transparency in contract
procedures and not to prevent new entrants from participating in the market.
Gas is transported from plants to users by decreasing supply pressures at pressure
regulator stations. Pipelines networks are so well accommodated as to meet gas pressures.
As gas distribution pipelines in which gas is carried by low pressure are not suitable for gas
transit in terms of excess capacity and that potential large users are expected to receive gas
supply by medium pressure, pipelines with higher than the level of medium pressure are
included in the possible facilities. The transportation service is not obligated to gas
utilities, but contracted under negotiation. This service, when it is implemented, is
categorized in the Gas Utility Industry Law as an associated business.
Deregulation in the electricity industry
What is happening in the electricity industry? Several problems have emerged in the
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electricity supply system in Japan and they required more flexible electricity markets. As
a result, an amendment to the Electricity Industry Law was passed and came into effect in
January 1996.
Major problems are as follows »
Electricity demand has been and is expected to grow in future, especially in the residential
market. The largest demand for growth will take place in the air-conditioning market in
summer. It will make the summer peak of electricity use sharper and the load factor
worse. The lead time required for the construction of large power plants is becoming
longer and the locations tend to be further away from areas of consumption. The
difference of electricity prices between Japan and other developed countries has also
drawn much public attention.
The report of the Urban and Heat Energy Committee of the Advisory Committee for Energy
to MITI on electricity issues reflected the above problems and recommended an
introduction of further competition into the electricity market, especially into the power
generation sector. It recommended the establishment of a wholesale electricity market
through extended use of cogeneration systems, fuel cells and solar powers. Direct supply
to users from non-utility generators were also recommended.
Firstly this abolished the complicated licensing procedures and demanding conditions so
far required when an IPP (Independent Power Producer) wants to sell electricity to a local
electricity company. In addition steel, oil, chemical and other industrial companies can
sell electricity to their local electricity company. This means the creation of new
opportunities for gas companies because a significant part of these IPPs are expected to be
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fueled by gas.
Further changes mean that within limited areas, non-utility generators can enter the
electricity retailing business if they have government approval. A typical example is an
urban area which is being developed. Here, a private company can install cogeneration
plants, and then supply electricity directly to end users. These cogeneration plants are also
able to supply thermal energy for heating and cooling which can be provided to the entire
area. Since a cogeneration plant generates thermal energy together with electricity, its total
energy efficiency is as high as 80%.
One of the purposes of the deregulation in the electricity industry is to promote this type of
highly efficient energy supply project, and the conditions for market entry by non-utility
generators are expected to be minimal.
Chapter 5: Concluding remarks
As I described before, the Japanese gas industry is characterized by three major and a large
number of small scale gas distribution companies. Compared with many gas industries in
the US and Western Europe, it is about to enter a new phase of transition and changes from
local supply monopoly. As in other countries, deregulation will lead to changes in
industry structure and management styles in each gas company. Natural gas used to be
considered merely as an oil substitute in the national energy policy. However, because of
its environmental advantages and high efficiency, it is now expected to play a greater role
as one of the Japan's principal energy sources. The gas industry will have to consider, in
this context, many important issues such as the contribution to a stable gas supply and
demand balance in Asia, the development of new gas supply sources, new types of LNG
trade, and gas import by pipelines.
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